How The Global Currency War Could Create Even Larger Chinese Asset Bubbles

The China Securities Journal has warned in a front page editorial that the global currency war, whereby nations are engaged in a game of competitive currency devaluation, could spark even further Chinese inflation:

Efforts by the United States and Japan to weaken their currencies would lead to higher global commodity prices and fuel money flows into emerging markets, pushing up inflation as well as stock and property prices, it said.

Against this backdrop, there will be considerable pressure on the yuan to rise, the paper said.

The central bank will find it difficult to raise interest rates because an increase in the Chinese yield spread over the United States Treasuries would only suck in more cash, it added.

China is caught in quite a bind thanks to its yuan-peg.

By holding the yuan at a level which much of the world considers undervalued against the U.S. dollar, China holds itself hostage to ultra-easy U.S. monetary policy, plus attracts speculative capital in search of currency gains.

Yet should China hike the value of the yuan, it could cause even more capital to flow into its economy on the hope of even further currency appreciation.